In mid-July, Standard & Poor's published its Global Challengers List for 2008.  According to the company, this list identifies:

300 mid-size companies that show the highest growth characteristics along dimensions encompassing intrinsic and extrinsic growth.  These companies are expected to emerge as challengers to the world's leading companies.

Canadian National Railway (CNI) reported its second quarter results on July 21; earnings per share declined 6% from last year to $0.94 [US] and net income was down 11%. Even so, CNI shares are up 4% since last week and up 12% since the beginning of the year, while the Dow is down about 12%. Why is CNI so steadfast in this recession; aren't railroads sensitive to the economy? One reason could be the just-announced buyback of 25 million shares. But I believe there are many other important factors that make this stock a compelling long-term value play.

First, while oil prices may be down from their record highs, I believe higher energy prices, in general, are here to stay. This may make rail a better shipping alternative than trucking - although it is slower, it is less costly. And, rightly or wrongly, many see it as "more green." Higher oil prices have also boosted interest in oil sands projects in the northern part of the Canada, which will require rail support from CNI. Today, the oil sands produce about a million barrels a day, but this number is expected to triple over the next 10 years. Besides the oil sands, Canada's potash mines, coal mines and corn distribution centers are located on CN lines.

Many income investors have looked to REITs (Real Estate Investment Trusts) as a source of dividends. REITs are pass-through entities and to qualify for this status, they must pay dividends equal to 90% or more of their taxable income. Because many REITs are now trading far below their 2007 highs, their yields appear very attractive. For example, National Retail Properties (NNN) currently pays a 6.6% dividend, while Realty Income Corporation (O) is paying 6.1% (the author is long O).

Since many of these companies were started after The Tax Reform Act of 1986, you won’t find them on S&P’s list of Dividend Aristocrats, which requires 25 consecutive years of increasing dividends. But there are some great dividend-paying REITs out there. Before you dive in, though, you might want to check whether or not the company has a policy of growing its dividend. If your dividends don’t grow at or above the rate of inflation, and you plan to hold the shares indefinitely (as an income investor) you may be losing ground financially.

If you are an income investor, you want to buy companies that are increasing their dividends. Given the slowdown in the US economy and the trend toward globalization, you may want to diversify your portfolio with some European dividend payers. You might be interested to know that S&P publishes a list of Dividend Aristocrats for Europe. The list consists of "large cap, blue chips" that have increased their dividends every year for the last 10 years. There are presently 31 companies on this list; however, some have grown their dividends at a much faster rate than others.

Here are the top European dividend growers using S&P's European Aristocrats as a starting point:

I hadn’t heard of this company until last year. If you don’t already know about it, you should. Greif, Inc. (GEF) has been in operation for 130 years, and has managed to get a lot of things right in that time, especially of late. While much of the market is struggling, GEF shares are near their 52-week high. Over the past year, GEF's share price has increased 24%. And since January, the stock is up 4%. Of course, the Dow and S&P 500 are in negative territory since January. Below a chart of GEF over the last three years, vs. the S&P:

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Standard and Poor's publishes a list of companies called the "Dividend Aristocrats." This list is updated every year: some companies are added, and some fall off the list. The criteria for inclusion is paying a dividend which has been increased every year, for the last 25 years.

There are currently 58 companies on this list, which I have copied below. However, the Dividend Aristocrats are not created equal. Some increase their dividends at significantly faster rates than others and the differences can be staggering.

Now that we are in a recession, I am looking at buying shares of industrial and aerospace companies, which have been beaten up of late (I’m a bit of a contrarian). One company I am looking at is United Technologies (UTX), a business in which I already own shares. I bought last year when the stock was at $73. As I think this company has strong long-term prospects, it might be worth buying more. The recent arrival of the company’s 2007 annual report in my mailbox gave me a reason to dig into its financials. Below is a chart of UTX over the last three years:

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By now, everyone knows that the Fed cut the federal funds rate, by 75 basis points Tuesday, to 2.25%. But was this the right strategy? Really, the Fed had to do it, given the recent "difficulties" at Bear Stearns (BSC) and other financial institutions. It seems like I said that a few months ago when Countrywide (CFC), American Home and Northern Rock had difficulties. Back then, mortgage backed securities became tough, if not impossible, to sell, and this created a crisis of confidence and liquidity that threatened better capitalized companies. And as that crisis has continued to the present time, the consequences of not cutting the rate would have been grim. Or would they?

If another rate cut was the right short-term strategy, I believe the hand of the current Fed was forced by Greenspan, who left rates too low for too long, a lax policy that created many of the current problems. The federal funds rate was below 2.0% for most of 2002 to 2004. And from June 2003 to June 2004 the rate was 1.0%. This created negative "real" interest rates for much of this time period. The last time the federal funds rate was so low was the late 1950's, another period of recession (see the chart below).

As goes the dollar, so goes the economy. Perhaps. The next FOMC meeting is March 20 and 21. It is almost a forgone conclusion that the Fed will cut rates, perhaps aggressively. Meanwhile, the dollar is weak, and another rate cut will likely weaken it further. It currently takes $1.01 to buy one Canadian dollar (called the loonie) and that is the wholesale rate. At a retail currency exchange you will pay about $1.09. In 2002, it cost only about $0.65 to buy one loonie.

So when in the past did the loonie exceed parity with the dollar? I'll give you some hints. The Everly Brothers had a big hit with "Bye Bye Love." Cadillac came out with a new model that had gigantic tail fins, below.

I like stocks that are consistent performers, especially in a downturn. That is why I am looking at Emerson Electric (EMR). Emerson is a diversified blue chip with a market cap of $41 billion. It’s the world’s leading maker of power equipment for oil companies, and its businesses include automation systems, climate control, power technology, and electric motors. Recently, EMR posted another stellar quarter: sales were up 12%, and earnings per share 20% over last year (see conference call transcript). So far, so good, but let’s dig deeper.

On Emerson’s balance sheet, long-term debt is only 15% of total assets ($20.8 billion), and is declining. Inventory levels are stable and the quick ratio is a respectable 1.01. Free cash flow (cash from operations less capital expenditures) was $2.3 billion in 2007 and is rising. This “after-all-bills” cash was used to buy back shares and acquire Motorola’s (MOT) communications computing business.

Dollar cost averaging can be your ally during a recession. If you think stocks will go down over the near term, i.e. the next one to two years, or that they will be range bound, this can be a good way to buy. Dollar cost averaging means spending a fixed sum at regular intervals over time, for example $300 per month for company X's stock over three years. Your return on any investment is dictated by the price at which you buy, so a low basis creates a defensible position. If you are in a market that is generally rising, you would of course fare better if you took the lump sum and invested it sooner rather than later.

However, if you believe, as I do, that the Dow will go down further (and who really knows for sure) then it can be better to buy a bit at a time. It's impossible to predict the bottom. There are several brokerage firms that provide a service through which you can buy a fixed amount of stock every month, including fractional shares. Some companies will pay all the broker's fees as an incentive to buy their stock, and some of these are excellent companies. But others don't pay the fees and these can substantially diminish your returns. Brokerage firms that allow you to buy stocks this way and some excellent companies that will pay the fees for you are listed after the jump.

On November 30, Royal Bank of Canada (RY) reported net income for the final quarter 2007 of $0.97 a share, well under Wall Street’s expectation of $1.07. This negative earnings surprise sent shares tumbling 4.0 percent in one day.

Royal, the largest bank in Canada, missed its target because of a $152 million subprime write down (CDOs and mortgage-backed securities). Of course, this pales in comparison to write downs at other major banks, such as UBS ($17.6 billion) and Citigroup ($18.2 billion this quarter alone). Royal Bank's CEO, Gordon Nixon, has gone on record saying it has no more than $1.0 billion linked to the U.S. subprime market. So what's in store for 2008? (Chart of the last three years below).

Earlier this week, the New York Times ran an article entitled: That 70s Look: Stagflation. The gist of it? The US is experiencing slower economic growth that requires a rate cut by the Fed. This is coupled with rising commodity prices. Sounds like, seems like stagflation. Similar stories have appeared in the Telegraph [UK], Guardian [UK] and Wall Street Journal. For those who remember, the 70s were a difficult economic period. As you can see below, in a chart of the Dow during the '73-'75 recession (indicated by the gray area), the index declined 28%. So what do I think will happen this time?

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